Tyler Cohen, at "Marginal Revolution", posts on state "price gouging" laws, here "Why don't we see more price gouging?".
"I survived hurricane Isabel, but couldn't buy a flashlight or the right size batteries, the night before the storm was to come. Merchants let supply run out rather than raise the prices. C.C. Kraemer at TechCentralStation.com tells us that half of all states have anti-gouging laws. More significantly, merchants fear that customers will resent price increases during times of trouble. The testable prediction is that wandering "umbrella merchants," as I have encountered in Manhattan, will raise their prices when it is raining. They have little reason to fear long-run negative effects on their reputation. I have found this to be true but can cite only two data points in its favor, twice I bought umbrellas for $10 rather than for the usual price of $5, and I paid more when it was raining...."
This Washington Post story by Kenneth Bredemeier, instances some of the price increases following Hurricane Isabel: "Those With Power Set the Price In Hurricane Isabel's Wake, Many Complain of Gouging "
"Yesterday in Takoma Park, parts of which were still without power, Darryl Williams poked his head into the 4th Street Market and announced he had a $600 generator for rent.
" "It's $100 an hour for a friend," said the 24-year-old D.C. man. "If I don't know you, it's $200 an hour."
"The store's owner, Quacy February, counted himself as a friend. But he still balked at the price. "That's a rip-off," he said.
"Across the street, Tim Jones, a 48-year-old Takoma Park resident, priced an hour with his generator -- which he bought for $400 -- at $200 an hour.
"So far, he said, there are three takers.
"I hate to say it," he said, "but it's not a fair price." "
As an economist I'd argue that the price increases serve a useful function by rationing available resources in short supply to their most valuable uses and by, by creating high short run profits, encouraging the production and delivery of additional supplies of necessary goods to the hard hit areas.
It's interesting that even people who receive the high price don't interpret the the prices are "fair." This implies that they feel the value from the availability of the resource (for instance, the generator above) should be made available to the person who wants to rent it, rather than to the person who owns it.
Perhaps this falls out of the "coding" of a loss as more valuable than an equal benefit - the result of the cognitive psychologist's asymmetric value function. The person whose power has gone out has suffered a loss - equal maybe to $200/hour. The ability to rent the generator at the old price ($25/hour?) lets the person minimize that loss, reducing it by $175 an hour. If the owner of the generator could rent it for $200 an hour, the owner would receive that $175 in value. However, people might instinctively view avoiding a loss of $175 an hour as more important than a gain of $175 an hour. This may be why they see the price increase as unfair.
The article points to the political reponse - the governor and the attorney general are calling for an "anti-gouging" law. This would essentially be a system of price controls imposed to prevent prices from rising in the new supply and demand conditions. This would exacerbate the conditions of excess demand, at least temporarily - lots of lines and waiting lists for access to goods and services. This would encourage efforts to obtain the needed items outside the region in which the price controls were in effect - but efforts by consumers rather than by the normal suppliers. If price competition were not used for allocating goods and service, people would compete for them in other ways. Alternative rationing systems might include discrimination by merchants on the basis of personal preferences for different people, trade at controlled prices with exchanges of favors or barter on the side, and under the table bribes and payments. Opportunities would be created to purchase at the controlled prices for resale at illicit, but uncontrolled prices, as below:
The article ends by pointing to the experience of a firm that continued to sell ice at pre-Hurricane prices, even after the demand shifted:
"Stuart Levin, general manager of Talbert's Ice & Beverage Service in Bethesda, said, "I can't get wet ice or dry ice fast enough. People started buying dry ice when the forecasts first showed a hurricane was coming."
"But he said the price his firm is charging is still the same as before the storm...
"Walk-in customers have streamed into the firm's Bethesda store, Levin said, but he soon became suspicious of one customer's need for dry ice.
" "He bought 400 pounds of dry ice [for $640] and he waited till my last truck pulled out and started selling it in my parking lot," Levin said..."
More price gouging posts available this morning. Tyler Cowen updates his discussion here: "More on price gouging". "Truck and Barter", here: "Costs and Benefits of Stable Prices " "Agoraphilia," here: "In Defense of Gouging" (you may have to scroll down to find this one (9-23-03) - Ican't seem to link directly to the specific posting). C.C. Kraemer at "Tech Central Station," here: "In Defense of Price Gouging". Arnold Kling, here: "The Case for Price Gouging". All of these links courtesy of the Tyler Cowen post leading off this paragraph.
Revisions at 7 AM, 9-23-03
